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Home > Smart Spending > Archives > 2008 > October > 22
Wednesday, October 22, 2008
Do you have a question about money?
The Atlanta Journal-Constitution
Want to learn how to better manage your money?
We recently gave readers the opportunity to ask the experts at the Consumer Credit Counseling Service of Greater Atlanta.
Question:
I’m trying to become debt free and don’t want even the temptation of credit cards. Should I use the bulk of my savings ($13,000) pay off the cards and cancel them or just continue to pay the monthly payment plus a few dollars more and not use the cards? - Katie
Answer:
Katie, that’s an excellent question. The answer will vary depending on how much debt your have. In general, everyone needs to have some cash on hand in a savings account in case of an emergency. We recommend you maintain six months worth of your living expenses in an FDIC-insured savings instrument.
On the other hand, your goal should also be to pay off all your credit cards and then put the cards away. But do not close the accounts. The exception to this rule is you might want to close accounts that have annual fees. But closing credit card accounts will reduce your credit limit and hurt your credit score. Let’s make some assumptions about your situation to illustrate one strategy you might take. Let’s say you have $8,000 or $10,000 in credit card debt and the interest rate is 20 percent. Meanwhile your savings account is earning a return of 4 percent. We would advise using part of your $13,000 to pay off the credit card debt and then start rebuilding your savings again over time with a goal of reaching six month’s worth of your living expenses in this account. This way you still have $3,000 or more in your savings account in case an emergency occurs while you are replenishing your savings.
Question: I’m a 58-year-old, 34-year veteran teacher nearing retirement. The TRS offers the option of taking a PLOP and lower monthly checks, or the regular retirement checks. How do I know which option is best for me? My husband has already retired from teaching and we will be debt free in about 3-4 more years. So do I PLOP or not? - Old School
Answer: For those not familiar with benefits offered to public school teachers, Old School is asking if she should take the Partial Lump-Sum Option Plan offered to members of the Teacher Retirement System of Georgia. This is a question that will vary by individual circumstance and carries important implications for a retired teacher’s financial well-being after they stop working. The option allows teachers to take a large one-time payment which is assessed against their total retirement benefit, resulting in smaller monthly payments over time than if they hadn’t taken the PLOP. Generally, a use of the lump-sum that enhances retirement income or savings may be worthwhile. Using the money for travel or things that won’t increase in value is not a good idea. Many teacher retirement systems suggest that employees consult a financial planner before they take a PLOP. Good advice.
Question:
I had saved up about 18 months of living expenses to cover my mortgage and bills in case of a lay-off. Well, I had a family emergency requiring me to spend that this past year to take care of it. I contribute the max to my 401(k) that my company allows — 25 percent — and also put in $100 a month in a Roth IRA. I want to build my savings back to that 18 month level. Should I suspend or lower my retirement contributions? Or should I claim more withholding or both? - Running on half a tank
Answer:
You are doing a great job at saving and you are to be commended on your determination and ability to think about the future. Consider temporarily lowering your contributions to your IRA to rebuild your emergency fund. Eighteen months of emergency savings is very cautious. Do you believe if you lost your job you would need 18 months to find a new job making similar income? If the answer to that question is “yes,” then resume your strategy of setting aside enough money to cover expenses for 18 months. But if the answer is “no” and you probably only need three to six months to find a new job, you should be OK with allotting six to eight months of your living expenses to an emergency fund. Make sure that your other debts are also paid while you are building up your savings. Once you rebuild your emergency fund you should resume contributing the maximum allowed to your retirement plans.
Question:
What is the calculation used to pay down a mortgage in half the time? For example, a 20 year mortgage with a fixed rate of 5.5 percent? - Keeps Money
Answer:
The calculation is a bit complicated because you have to take compound interest into consideration. We’d recommend you skip the algebraic calculation and go to Mortgageloan.com’s Payoff Calculator. Using that calculator, if you borrow $200,000 at 5.5 percent interest over 20 years you’ll pay a total of $330,187 over the life of the loan, with monthly payments of $1,376. If you paid an additional $800 per month, you would pay the loan off in 10 years and save $69,931 in interest.
Do you have questions about money matters? Submit your questions and we’ll get the answers.
For more money-saving advice, go to Your Money
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